Gold prices poised to move higher

NEW YORK (CBS.MW) -- Gold futures prices have risen 16 percent since the start of the year and analysts predict that the precious metal will shine more brightly in the next few years.

Prices for the December gold contract traded as high as $329 an ounce as recently as Tuesday, sharply higher than the $282 level it was at in January. See full story.

The most commonly cited reason for the climb is that traders have sought out a safer investment. In an unstable stock market stemming from the September terrorist attacks, as well as the corporate scandals that kicked off with Enron's demise late last year, gold is seen by many as one of the safer places to park money. See Scandal Sheet.

And then there's the threat of war. More recently, prices have been supported by the rising likelihood of a U.S. campaign against Iraq that could disrupt oil supplies, sending crude prices skyward and placing pressure on the economy.

"Basically, people are nervous at the moment and don't want to be caught short of gold if anything does kick-off, which it could well do at the moment," said James Moore, an analyst at metals commodity information provider TheBullionDesk.com.

But the "safe haven" concept isn't the only thing gold has going for it.

"We feel gold is certainly headed higher on fear of war, but the problems run much deeper," said Kevin Kerr, an analyst at financial market information provider Weiss Research in Palm Beach Gardens, Fla.

Analysts attributed their expectations for higher gold prices to investors' changing view of the precious metal and its potential as a currency substitute, historical trends in the market as well as supply and demand issues.

Changing view

Investors have felt gold's attraction for centuries, said Kerr, but these days, "the allure is in its intrinsic qualities."

Investors understand that they can turn gold into cash quickly because it always has real value, he said, so "expect gold prices to rise sharply as investors begin to consider the metal as a substitute even for currencies."

Frank Holmes, chief investment officer of asset managers U.S. Global Investors pointed out that gold is "not dependent on any corporation or government's 'promise to pay'."

Individual investors have moved $650 million into gold funds in the past twelve months, a rise of 37 percent in the flow of money into gold funds.
Kevin Kerr, Weiss Research

It's also a hedge against bank failure, foreign exchange controls and currency devaluation, he said.

The change in investors' view of gold is apparent when you consider that individual investors have moved $650 million into gold funds in the past twelve months, a rise of 37 percent in the flow of money into the yellow metal's funds, according to Kerr.

"We expect this flow to turn into a flood over the next year," he added.

Historical proof

Historically, gold's strength has shown through during tough economic times.

By 1980, the U.S. market had "trained everyone that they had to own gold," said Todd Hultman, president of Dailyfutures.com, a provider of commodity information.

Gold for June delivery closed at $886.40 an ounce back on Jan. 21, 1980, during a time when the U.S. government was fiscally out of control, having tripled federal spending in the 1970s and inflation was out of control with the value of the dollar shrinking rapidly, he said.

And three times over the past 25 years, "during periods of truly serious international tensions, gold have proved vital to investors," said Kerr, noting that three weeks after Iraq's invasion of Kuwait, the price of gold was up 18 percent and the Dow Jones Industrial Average
DJIA, -0.37%
was at least 8 percent lower, he said.

But as recently as the end of March 2001, gold prices on the spot market closed at $257.90 an ounce, one of the lowest prices in over two decades and below the cost of production for most mines, Hultman said.

Gold is set to benefit "until there is a clear improvement both economically and geo-politically and that seems unlikely for a long time to come."
Kevin Kerr

By that time, "no one wanted gold anymore," he said, and many mines were either sold off cheaply or closed completely following "incredible" returns in stocks and bonds over a period of twenty years.

Now gold is about 20 percent higher than the lows of last year and producers are still focused on trying to lower costs, Hultman said.

"Investors that had to own gold were wrong in 1980 and investors that thought that gold was obsolete were also wrong in 2001," he said. "The truth is somewhere in the middle, but you often have to go through the extremes to get there."

Still, Kerr said the market "can't deny that the current stakes are extremely high for the world's leaders and gold prices are likely to benefit, until there is a clear improvement both economically and geo-politically and that seems unlikely for a long time to come."

Supply and demand

Cost reductions, falling output and mine closures by major metals producers following gold's price drop to twenty-year lows last year also imply that supplies could become tight.

The outlook for gold is "very constructive," amid shrinking mine supply, said Holmes.

Metals producers have a difficult time opening new mines because of costs and environmental issues and the political situation in certain countries, he said.

"When it comes to gold, we are so far away from needing an exit door that it is not worth talking about yet."
Todd Hultman, Dailyfutures.com

London-based commodity consultant Gold Fields Mineral Services issued a forecast on Tuesday that global mine production of gold would be down by 3 percent year-over-year at 2,514 metric tons in 2002. The output drop would be the first since 1995. See GFMS report.

And on Thursday, Barrick Gold
ABX, +1.09%
lowered its earnings target for the third quarter and full year, citing production problems and higher costs. See full story.

Meanwhile, investment demand is up 12.2 percent on a year to date basis as a weaker U.S. dollar against major world currencies made dollar-denominated gold less expensive to foreign traders, according to Frederic Panizzutti, an analyst at GoldAvenue, a major gold online trading company.

With the general interest for gold gaining over the last few months, "conditions seem to be in place for more investor demand over the coming few months," Panizzutti said.

The gold market has also seen a great deal of consolidation in recent years. South Africa had 35 gold producers in 1996, but that fell to just 5 in 2001, according to Hultman, who cited a Barron's article.

He predicted that with fewer producers, prices aren't likely to trade below $300 again this decade.

"When it comes to gold, we are so far away from needing an exit door that it is not worth talking about yet," Hultman said.

All these factors will likely bode well for prices, which have the potential to reach $400 an ounce "sometime" in the next two years, he said.

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